Magazine

Ouch! It's Superpeso

March 31, 2002

It's a strange sort of role reversal. Mexico's Grupo IMSA has been manufacturing steel products since the 1930s. In recent years, with help from the North American Free Trade Agreement, the company has become a big, export-oriented conglomerate with $2.2 billion in sales. One of its many U.S.-bound products was insulated metal panels used in refrigerated storage rooms. But now IMSA is importing the panels into Mexico from its plant in Lewisville, Tex.

The reason: the amazing strength of the Mexican peso. Bolstered by robust foreign investment, the peso is one of the few currencies that has been appreciating against the U.S. dollar. One result is that Mexican wages and prices are rising so fast that some operations are less expensive north of the border. "Many of our inputs are cheaper there: electricity, natural gas, and petrochemical products," says IMSA Chief Executive Eugenio Clariond.

The peso gained nearly 6% against the dollar last year, making it one of the world's best-performing currencies. That's a distinction Mexican companies such as IMSA could gladly live without. Businesspeople complain that the appreciating peso is crimping their competitiveness at home and abroad. Foreign makers of low-margin goods, such as apparel and cellular phones, are already decamping to China and Honduras, and others may follow if the "superpeso," as locals call it, doesn't cool down. "The superpeso could kill our productive capacity," says Alfredo Camhaji, director of economic studies at the National Chamber of Manufacturing Industries. Mexico's exports, hit by the combination of a U.S. recession and the strong peso, fell by 3.9% last year. Largely as a result, half a million Mexicans lost their jobs.

Why such a strong peso? Mexico is now a safe harbor for international investors seeking refuge from tempests in the rest of Latin America. Its sound economic fundamentals recently earned the country a prized investment-grade rating from Standard & Poor's. The upgrade attracts more portfolio investment--which only serves to bolster the currency further. In three years, the peso has strengthened over 25% in real terms against the greenback.

That trend is gradually eroding the competitiveness of Mexican industry, which hasn't been able to boost productivity fast enough to counter the effects of the currency appreciation. Mauricio Gonzalez, chief economist at consulting firm Grupo de Economistas y Asociados, figures that for every percentage-point increase in the value of the peso, Mexican manufacturers must cut labor costs from three to five percentage points to protect their operating margins. Volkswagen is poised to ax 1,300 workers at its plant in Puebla after employees rejected a deal that would have cut salaries by as much as 10%. Others are searching for cost savings elsewhere. Grupo IMSA has boosted productivity at its auto-battery unit to eight batteries per man-hour from three. Yet Clariond says: "It's very difficult to compensate for salaries that are substantially higher in dollar terms than three years ago."

The strong peso has also fueled Mexicans' appetite for imported goods. Sales of foreign-made cars and trucks surged 20% in 2001--even though the economy shrank by 0.3%. Economists say the current-account deficit could reach 4% of gross domestic product next year. Although that number is cause for some concern, it's not likely to spark the kind of investor stampede that triggered a peso crash in 1994. "The fundamentals in Mexico are very good, so there's no reason for the market to panic," says Robert Berges, senior Latin America strategist for Merrill Lynch & Co. in New York.

Nonetheless, many Mexican exporters are clamoring for the government to take steps to weaken the peso. "The exchange rate is too sensitive and important to leave it at the mercy of the market's invisible hand," says Camhaji. Central Bank chief Guillermo Ortiz says his job is to tame inflation, not manipulate the nation's currency--though critics charge that his tight-money policy has contributed to the peso's strength. With luck, the free-floating peso will gently drift to a lower level. Mexican business is hoping that it will happen sooner rather than later. By Geri Smith in Mexico City